Over the last five years, Samsung has become a behemoth in the tech landscape. Its smartphones dominate the market and its profits have been relatively good considering the company still makes most of its money on hardware.
However, as we have seen in the PC market, a hardware-only business model is not sustainable. Indeed, as smartphones become more and more commoditised, Samsung's profit margins will fall closer to 10-15 per cent within three years unless it does something drastic to prop up its overall earning potential.
Samsung is one of the most vertically integrated companies in the tech arena and can leverage this to help margins for some time. Even so, it must take control of its destiny lest it go the way of any of the PC companies beholden to Microsoft and Windows, those that have seen their margins shrink consistently as PCs have become commoditised.
In this case, Google and Android replace Microsoft and Windows, and at the moment, Samsung is just a front-end to deliver more and more customers to Google and its ads, services, and products via Samsung devices. Given the fact that 50 per cent of Android devices are made by Samsung, and that Samsung's cut of any related profits is the same as even tiny companies that also back Android, if I ran Samsung, I would be really angry. Samsung is making Google richer while potentially jeopardising its future earnings potential by continuing to back Android.
Samsung clearly understands this. It's certainly rethinking its relationship with Google and its support for Android. In fact, at its recent developers' conference Samsung showed off its own mobile OS that uses Tizen at its core, and the company has even started paying developers to write apps for it. At first glance it seems that Tizen is focused on the Asian market but don't let that deceive you; I think there is something bigger in the works.
So what is Samsung up against if it continues down the Android path? Firstly, it just continues to make Google wealthier and build Google's user base. Yes, Android has served it well so far, but as long as Google owns the OS, Samsung is just a slave to Google.
Secondly, it drives revenue to Google – revenue that could be its own if Samsung owned the customers. Thirdly, it will continue to face margin pressure as hardware-based profits shrink.
There is a reason Samsung copies and steals from Apple: It looks at Apple's ownership of its entire ecosystem and lusts after this scenario. Apple is mostly insulated from low-margin pressure since it not only profits from hardware but also from apps, products, and services. It can do so since Cupertino owns its OS and ecosystem, and controls its destiny across the board. Put more directly, Apple gets all of the profits from hardware, software, ads, and services, while in Samsung's case, Google gets most of the ad revenue, app sales profits, and services sales.
Arguably, Samsung was even the force that made Android successful, yet Google will not share the wealth any more than it does with the other Android licensees. Samsung consequently must be steaming and looking for a way out. However, it is boxed into a corner in the short term. It can and will modify Android as much as is possible without losing the store certification because the apps on Android that are both legitimate and illegitimate (the latter being important in China) are too vast for them to abandon. Not being able to run Android APK apps would be suicide for anyone in the short term. Its developer environment is still based on Android, so it seems it is trying to create a para-platform on top of Android that still uses the store but gets custom apps created in its ecosystem.
Even though it can add some customisation, it is still pouring money into Google's coffers, which is leading Samsung down a path where a hardware-only play could hurt it big time in the future. Keep in mind that all OEMs backing Android are getting the same OS even though hardware may differ. It becomes harder and harder to differentiate with Google in control of the OS and related products and services.
So what can Samsung do to extricate itself from Google's powerful grip? Some industry folks think Samsung could just fork Android the same way Amazon has done with its Fire OS. But even given Amazon's clout, the app selection is scarce with Fire OS, and staying with Android even in a forked mode could be confusing for Samsung's customers in the long run.
I think Samsung is working towards ditching Android completely sometime over the next three to five years in order to take complete control over its future. And this is where the backing of Tizen becomes interesting and important. Although Tizen has not attracted a lot of app support to date, if Samsung gets behind it and is able to prove to the market that it will continue to innovate around the platform, delivering hundreds of millions of smartphones and tablets annually under its brand, software developers would be crazy not to develop for it.
Now Google won't let Samsung dump it without a battle, but it likely won't adjust Samsung's revenue share either, since by doing so it would probably have to offer similar terms to other big Android vendors as well. Still, Mountain View could be creative in trying to keep Samsung in the Android fold as well as pressuring it in unimaginable ways. After all, what Google wants, Google mostly gets.
For more on Tizen, see: Samsung’s potential escape route from Android – support for Tizen grows.